Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is $10, and the elasticity of demand for the product is -3. What is the profit maximizing monopoly price for this patented drug product?

Question

Quizplus · Accepted Answer

To maximize profit, a monopoly will set its price where marginal revenue (MR) equals marginal cost (MC).

Given elasticity of demand (Ed) is -3, we know that the demand is elastic because the absolute value of -3 is greater than 1.

We also know that for an elastic demand curve, marginal revenue is negative. The formula for marginal revenue is:

MR = P (1 + 1/Ed)

So in this case, MR = P (1 + 1/-3) = P (2/3)

Setting MR equal to MC, we get:

P (2/3) = $10

Solving for P, we get:

P = $15

Therefore, the profit maximizing monopoly price for this patented drug product is $15.

Bancroft Pharmaceuticals Has a Patent on a New Medication Used